Financial Assistance: Dyment v Boyden and others [2004] All ER (D) 463

The Law

The Companies Act 1985, s151 provides that financial assistance is generally prohibited so that where a person is acquiring or is proposing to acquire shares in a company, it is not lawful for that company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same times as the acquisition takes place.

Financial Assistance means financial assistance given (i) by way of gift, (ii) by way of guarantee, security or indemnity, other than an indemnity in respect of the indemnifier's own neglect or default, or by way of release or waiver, (iii) by way of a loan or other agreement under which any of the obligations of the person giving the assistance are to be fulfilled at a time when in accordance with the agreement any obligation of another party to the agreement remains unfulfilled, or by way of the novation of, or the assignment of rights arising under, a loan or such other agreement, or (iv) any other financial assistance given by a company the net assets of which are thereby reduced to a material extent or which has no net assets.

The Case

The High Court was asked to consider whether the entry into a lease by a company was for the purpose of the acquisition of its shares and whether this was in breach of section 151 of the Companies Act 1985.

The Facts

The applicant A, E and P were directors of a company which operated a residential care home from premises called The Mount. The property was owned in equal shares by the directors. Regulatory problems arose which meant that E and P had to exit the business. They transferred their shares in the company to A, A gave up her interest in the property and E and P granted a 21 year lease to the company at a rental, which the court agreed was in excess of the market value. After a period of time, E and P commenced proceedings against the company for arrears of rent and obtained judgment against the company for approximately £140,000. Whilst the rent action was pending a resolution was passed to wind up the company and following judgment in the rent action, E and P submitted a proof in liquidation in respect of the judgment sum and thereafter a proof in respect of further amounts of rent arrears.

A was a creditor and shareholder of the company and challenged the proofs. One of her grounds was that in entering into the lease, the company had given unlawful financial assistance as it had done so in relation to a transaction which involved the transfer to A of E and P's shares in the company and had therefore been "directly of indirectly for the purpose of that acquisition".

Decision

The court dismissed the application. Looking at the timing and commercial realities of the transaction, the court took the view that the company's entering into the lease could not be said to be "for the purpose of the acquisition". It appeared that the applicant's main purpose in agreeing that the company should enter into the lease was to secure premises for the operation of the business. A agreed to the excessive rent because E and P were in a position to demand such a rent as they knew that A would be unable to operate her business without it. The court opined that entering into the lease could therefore be said to be "in connection with" the acquisition of the shares, which was the test under the pre-1985 financial assistance provisions, but this was not sufficient for the current legislation.

Summary

In this case and in other recent cases on financial assistance (Chaston v SWP Group plc [2002] EWCA Civ 1999, [2003] 2 BCLC 676 and MT Realisations Ltd (in Liquidation) v Digital Equipment Co [2003] EWCA Civ 494, [2003] 2 BCLC 117) ("MTR") the court in each case has looked very carefully at the commercial realities of the transactions involved in determining the application of section 151. This test was originally expounded by Hoffman J in Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1 (a case on the pre-1985 legislation). The fact that the courts continue to emphasise the importance of examining the commercial realities of transactions in section 151 cases with very different facts means that it is difficult to determine a consistent approach: the Court of Appeal in MTR stated that "the authorities provide useful illustrations of the variety of fact situations in which the issue can arise, but it is rare to find an authority on s 151 which requires a particular result to be reached on different facts". Until a section 151 case reaches the House of Lords and a degree of clarity is provided, practitioners will continue to take a cautious approach to financial assistance when advising clients.

For further information please contact John Evans at john.evans@cms-cmck.com or on +44 (0)20 7367 3361